Takeover time

Despite European sovereign debt woes and stubbornly high levels of unemployment in the US, the engineering and construction sector managed to keep smiling in 2010, with new, larger companies emerging from the credit crunch. the global mergers and acquisitions market may be set for a better year

Mladen Petrov

ACS, Spain's biggest public construction group, started the year with some big news. The company succeeded in snapping up a stake of more than 30 pct in Hochtief, a move which was perceived as a key step towards taking overall control of its German-based rival. According to German law, going above the 30 pct threshold allows the purchase of shares on the market without the need to launch a new takeover bid. Earlier, in December 2010, Hochtief sold a 9.1 pct stake to a Qatari investment fund to dilute ACS' holding and force it to improve its offer. The news about ACS' increased stake was naturally greeted with a lot of media attention. ACS, an abbreviation for Actividades de Construcción y Servicios, has debts of more than EUR 9 bln and is now looking to expand its construction and property activities outside of its credit-crunched homeland. On the other hand, the blue-chip German company receives more than 90 pct of its annual revenue of USD 24 bln from outside Germany. Concerns have been expressed back home that Spanish control would weaken Hochtief's ?made in Germany' brand and load the company up with ACS' debt. In the view of ACS, however, the potential merger would create perhaps the most powerful building services company in the world, with operations in Europe, Asia, Latin America and the US.
It seems that for the last two years the majority of construction companies across the region have just been focusing on weathering the storm and making it through the downturn. Nevertheless, there are also firms with cash in their pockets and an appetite for growth that have recently been sniffing around for acquisition opportunities. Few have been able to snap them up, and are instead getting ready for the return of the good times as the crisis fades into the past. In March, Strabag SE, the largest construction company in the CEE region, simultaneously acquired two of Switzerland's major regional construction companies - Brunner Erben Holding and Astrada - and thus emerged as the third-largest construction company in the country. "These acquisitions demonstrate our determination to be a leading player in each of our key countries," commented Hans Peter Haselsteiner, Strabag's CEO.

Time to buy
Transactions like this are consistent with an ongoing trend. According to a US report by PwC, the 2010 total deal value for mergers and acquisitions in the construction and engineering sector jumped 63 pct in comparison to the 2009 figures. Improving conditions have encouraged financial investors to return to the engineering and construction (E&C) deal environment after several quarters of declining participation. Merger and acquisition deal activity in the global E&C sector showed continued improvement in Q4 2010, rising 39 pct in deal value and 47 pct in deal volume over the quarter to USD 18.6 bln from 50 transactions (deals valued at USD 50 mln or more).
Overall, total annual deal volume increased from 139 in 2009 to 161 in 2010, while deal value increased from USD 42.1 bln in 2009 to USD 68.6 bln in 2010. "Interestingly, despite the debt woes in Europe and persistently high levels of unemployment in the US, the engineering and construction sector remained optimistic," comments Kent Goetjen, US engineering and construction industry leader at PwC. It is worth noting that strategic investors are continuing to drive the majority of deals, accounting for 73 pct of total deal activity in 2010, up from 67 pct in 2009. As the PwC report notes, financial leverage has remained flat but the cash available in the sector has increased, putting many E&C companies in a strong position for future acquisitions. Asia and Oceania continued to drive deal activity, accounting for 48 pct of deal volume in Q4. The Eurozone ex-UK region saw a significant decline in activity, decreasing to 4 pct in Q4 from 14 pct in Q3, while the UK and Eurozone region remained steady at 20 pct, despite ongoing concerns about economic recovery in the Eurozone.
Looking to benefit from the more attractive prices available, companies have been expanding across the region, both organically or by acquiring construction companies. But are the deals about to dry up? Not at all, it would seem. M&A advisors in the CEE region are optimistic and forecast a slight acceleration in deal-making in 2011, after a strong performance in 2010. Although country outlooks vary, most advisors agree that the number of deals could exceed pre-crisis levels, but the average deal size is expected to decrease. In Poland, the growth trend in the M&A sector is expected to continue in 2011 and will be evident both in private equity deals and in the consolidation of Polish companies.

Expansion mood
In fact, when talking to construction company CEOs, one may get the impression that they are only now getting started with their acquisition activities. "Our strategy is to expand construction services to countries that have a great need for new housing and, on the other hand, building system services to countries where the building stock is more developed but requires upkeep and maintenance. This means that in Central and Eastern Europe we can see the growth potential for construction services. Our aim is to increase our construction services in Finland, Russia and the Baltic countries as well as in Central and Eastern Europe, where we have already started operations in the Czech Republic and Slovakia. We are also looking at possibilities in Poland. Central European countries have a need for new housing due to the migration into cities, the drive to improve living standards and the growing middle-class, among other factors," explains Juhani Pitkakoski, CEO of Finnish-based construction company YIT.
Over the last year, YIT, one of the biggest Nordic construction companies, managed to close two acquisition deals in the region as part of its current expansion strategy. Last year the firm completed the acquisition of Slovakian construction company Reding. As part of this deal YIT acquired 70 pct of Reding's shares. Following the acquisition, the company will continue to operate as a general contractor as well as a developer of residential and commercial projects under the name YIT Reding. The company already had several ongoing construction projects prior to the acquisition, as well as a number of plots for future residential and commercial development projects. "We look at companies that provide a good foothold for entering a new country. The competence of the personnel, the market knowledge and the company culture all play an important role. We are interested in companies with which we can benefit from the synergy effect," adds Juhani Pitkakoski. Earlier in 2010, YIT acquired the entire CE business operations of Caverion, a company providing building system services in Germany and Central Europe.
Following these recent developments, YIT announced in February that building services in Central Europe will become its fourth major business segment, after building services in Northern Europe, construction services in Finland and international construction services. The move comes after the company's recent growth in operations in the region. From 2008 to 2010, the company's revenues from building services in Central Europe grew from EUR 182.6 mln to EUR 550.2 mln. In the same period, its order backlog jumped from EUR 265.6 mln in 2008 to EUR 507 mln by the end of 2010. Over the last two years the firm's personnel in the region almost doubled from 2,083 employees in 2008 to 3,767 at the end of 2010.

Getting ready
Skanska has also recently returned from a shopping spree in Slovakia. The company recently took over SkyBau - a construction company also active on the residential development market - acquiring 100 pct of the firm's shares. SkyBau's previous CEO cited the impact of the economic crisis and the lack of construction contracts as the main reasons behind his decision to sell the company.
In 2010, Polish-based construction company  ABM Solid continued to build its capital group through another acquisition. The Tarnów-based company bought a 98.07 pct stake in Przedsiębiorstwo Robót Inżynieryjnych Budownictwa (PRIB) of  Olsztyn for app. PLN 38 mln. "We are still looking to take over other companies in the construction industry, which will allow us to enter new markets, both in terms of geography and field of expertise, with a special focus on the construction of facilities in the power sector. We are counting on the prospect of growth in the number of contracts in this sector," comments ABM Solid's CEO Marek Pawlik. "In this region our target is to focus on residential development; however, other projects could also be considered. Expansion into new markets would take place through acquisitions and for this we are constantly scanning the options," Mr Pitkakoski says. The company has already expanded its operations into the Czech Republic and Slovakia by acquiring local companies. In 2011 the company, this time as a property developer, plans to start the construction of a total of 240 flats in five locations in Prague. Eventually, the firm wants to become one of the five biggest players on the Czech market, in which it has been active since 2008.